Why Your Qualified ESPP Should Offer a 15% Discount

If your company offers an ESPP or is thinking about implementing one, you might wonder what percentage discount your plan should offer. Based on the results of the NASPP/Deloitte Tax 2023 ESPP Survey, I have an answer for you: 15%. Here’s why.

It’s the Most Common Discount Offered

In all our surveys—dating back to more than 20 years ago—we have always found 15% to be the most common discount offered, by a pretty wide margin. This is despite rumors of the demise of 15% discounts in the lead-up to the adoption of FAS 123(R) (now ASC 718).

This is certainly true in our most recent survey, in which 85% of companies that have a qualified ESPP offer a 15% discount.

Prevalence of 15% Discounts Is Increasing

Not only does our most recent survey find that 85% of qualified ESPPs offer a 15% discount, this is up from 70% of qualified ESPPs in our 2020 survey—a remarkable increase over the past three years.

Some of the shift is attributable to changes in the population of survey respondents: nearly 60% of respondents to this year’s survey are technology companies (including life science companies); in 2020 this sector represented only 42% of the respondents that offered an ESPP. Technology companies are more likely to offer an ESPP and the ESPPs they offer tend to be more generous than those offered by other companies.

But the increase is not solely attributable to the demographics of the respondent population. When we look at the results by sector, we see increased use of 15% discounts among both tech and non-tech companies. For qualified ESPPs, prevalence of a 15% discount increased from 78% in 2020 to 92% in 2023 (yes—you read that right—ninety-two percent!). For non-technology companies, prevalence of a 15% discount increased from 61% in 2020 to 73% in 2023.

Most Companies View the Discount as Key to Success

It makes sense that so many companies are committed to offering a 15% discount. When asked what features respondents consider to be key to a successful plan, the discount offered comes in on top, with 43% of companies ranking it as the most important feature, 20% ranking it as their second priority, and 11% ranking it as their third priority.

Respondents were given a choice of nine features to select from, with the option to write in a feature not included on the list. Other features on the list that ranked lower included a lookback, simplicity of plan design, stock price performance, and employee communications.

The Discount Drives participation

It’s also clear that a 15% discount drives participation in an ESPP.  Overall, the median participation rate reported by respondents is 38%. In other words, at half of respondents, less than 40% of employees participate in the ESPP.

But at companies that offer a 15% discount, the median participation rate rises to 48%, a full 10 points higher than the overall median participation rate.

What Else Drives Participation?

To be honest, less than half of employees participating in respondents’ ESPPs is still a little disappointing to me. Sure 48% participation is an improvement over 38%, but I’d really like to see participation rates that are a lot higher.

And it is possible to achieve much higher rates of participation. Ten percent of respondents report participation rates that exceed 70%. So, besides offering a 15% discount, what else can companies do to boost their participation? Here are a couple of ideas.

It probably won’t surprise you to learn that investing in employee education for the plan is one way to increase participation. The median reported participation rate increases for companies that use multiple methods to educate employees about the plan, with the highest median participation rate (52%) reported for companies that use four methods.

Consider going beyond email, such as using your company’s internal collaboration tools (such as Slack or Teams), text messaging, or even a print mailing. Many third-party administrators and brokers also offer excellent educational materials, including videos. Check with your provider on their offerings—leveraging these tools can be an easy way to expand your educational program.

Another important strategy to help grow participation in your ESPP is to set a target participation and track your progress towards reaching this goal. You’ve probably heard the adage “what gets measured, gets managed”; this applies to your ESPP too.

Most important, when evaluating your participation rate, analyze participation by various employee segments. Here are a few examples of how to segment your eligible employee population for this purpose:

• Compensation level
• Job level
• Country
• Department
• Age
• Gender
• Ethnicity

This analysis can help you identify areas where you need to focus or expand your investment in employee education and help you identify barriers to participation that might be addressed through plan design.

Current Interest Rates

You want the discount offered under your ESPP to outpace, by a wide margin, the interest rate employees could earn on a savings account. Although ESPPs are low-risk investments, they have a higher risk profile than an FDIC-insured bank account. If the return available in your ESPP could be close to or below the return employees can earn in a savings account, participating in the ESPP simply might not make sense for some employees.

With interest rates on high-yield savings, money-market, and CD accounts nearing or exceeding 5%, this puts pressure on your ESPP to offer a competitive return. A safe-harbor ESPP, which is noncompensatory under ASC 718, but at the trade-off of no lookback and a maximum discount of 5%, is unlikely to be an attractive investment for many employees right now.

A 15% discount (with or without a lookback), is a much more compelling investment, even with today’s high interest rates.

What About Offering a Match Instead of a Discount?

I love a match! I think employees can more easily understand the financial benefit of a match than a discount. As a result, even a match that is economically the same as a discount can result in a more compelling ESPP for employees. If you have a nonqualified ESPP, you should forget everything I’ve written in this blog entry and go for a match instead of a discount. If your match is in the form of contributions, I recommend at least a 17.6% match, which is equivalent to a 15% discount. (Heck, why not just round it up to an even 20%? No one likes decimals.)

Unfortunately, it is not clear that a match is permissible in a Section 423 qualified plan, so if you have a tax-qualified ESPP, I stick by what I’ve said above: a 15% discount is the best you can do for your employees and makes your ESPP both compelling and competitive.

More ESPP Trends

The results are in for the 2023 ESPP Survey, co-sponsored by the NASPP and Deloitte Tax. If you would like to hear more ESPP trends from the survey, check out our webinar highlighting the results.